NFP Jobs Report Could Shake Stocks, Crypto, Dollar and Bonds as Traders Watch Fed Policy Signals

The September U.S. Nonfarm Payrolls (NFP) report is expected to be one of the largest market catalysts and investors will watch closely whether the employment data will boost or douse Federal Reserve policy expectations. August employment is particularly critical because it comes just ahead of the Federal Reserve’s September meeting and follows an unexpectedly weak July reading.

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U.S. nonfarm payroll employment declined by 23,000 workers in July, with the unemployment rate at 4.1 percent, according to the Bureau of Labor Statistics. Previous monthly employment numbers were also revised lower, adding to concerns that hiring momentum has decreased significantly.

Economists are expecting a modest rebound in employment for August. Reuters’ prediction is about 56,000 new jobs and Wall Street Journal’s is around 53,000. Other views are somewhat higher, with some economists forecasting between 65,000 and 80,000 jobs. The unemployment rate is expected to remain around 4.1%, though some forecasts are to rise up to 4.2%.

The relatively low payroll-growth forecasts illustrate the state of the job market in the U.S. right now. Rather than a spectacular fall in employment, recent indicators suggest a slower hiring environment with relatively low layoffs. Weekly jobless claims have been fairly contained, supporting the view that the economy may be in the “slow-hire, slow-fire” phase rather than recession.

For stock market players, the reaction to the NFP report will be crucial to how accurate the actual figures are compared to expectations. A slightly weaker-than-expected payroll number can reinforce the market’s belief that the Fed will be less aggressive in rate policy. Treasury yields and the dollar could be lower and stocks and bonds and cryptocurrencies can rally.

A very bad employment report, however, could dramatically alter the reaction. If payroll growth is again negative and the unemployment rate is higher, investors might start to worry the slowdown is turning into a wider economic downturn. In such circumstances the initial reaction may not necessarily be good for risk assets. Instead, recession fears could trigger a wider risk-off move across equities and crypto markets.

A stronger-than-expected job report might also revive expectations for tighter Fed policy. A strong payroll beat and stronger wage growth and a stable or lower unemployment rate could push Treasury yields higher and support the dollar. Higher yields would then put pressure on rate-sensitive assets like technology stocks and cryptocurrencies.

In a way, wage growth will also be a big component of the report. Current expectations are for average hourly wages to increase around 0.3% a month and about 3.0% a year. A big hike in wages would be problematic for the Federal Reserve's inflation strategy even though the payroll growth remains still weak.

The market is also going into the report with Federal Reserve policy expectations extremely sensitive. Current pricing is almost evenly split whether the Fed will raise rates by 25 basis points in September or leave rates unchanged, and so the employment report could influence expectations in either direction.

For risk assets, the best scenario would be a “Goldilocks” jobs report: payroll growth slightly below expectations but not so weak as to create serious recession concerns. This kind of result could strengthen expectations for easier monetary policy and keep investors optimistic about the economy’s health.

Traders will be watching more than just the headline payroll number. The unemployment rate, average hourly earnings, labour-force participation, private-sector hiring, government employment and revisions to previous months could all influence the market reaction. A relatively modest headline number could still generate significant volatility if the underlying details surprise investors.

With expectations already set for relatively weak employment growth, today’s NFP report could move Treasury yields, the dollar, equities, bonds and cryptocurrencies simultaneously. The key question for markets is whether the August data confirm a controlled cooling of the U.S. labour market or signals a much more serious deterioration.